Nan Nan Resources Enterprise Limited (HKG:1229) is a small-cap stock with a market capitalization of HK$182m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Evaluating financial health as part of your investment thesis is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We’ll look at some basic checks that can form a snapshot the company’s financial strength. However, potential investors would need to take a closer look, and I recommend you dig deeper yourself into 1229 here.
1229’s Debt (And Cash Flows)
1229’s debt levels surged from HK$234m to HK$271m over the last 12 months – this includes long-term debt. With this rise in debt, 1229 currently has HK$356m remaining in cash and short-term investments , ready to be used for running the business. Additionally, 1229 has generated HK$33m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 12%, indicating that 1229’s debt is not covered by operating cash.
Can 1229 meet its short-term obligations with the cash in hand?
With current liabilities at HK$126m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.56x. The current ratio is the number you get when you divide current assets by current liabilities. Having said that, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
Does 1229 face the risk of succumbing to its debt-load?
With total debt exceeding equity, 1229 is considered a highly levered company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies.
Next Steps:
1229’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around 1229’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure 1229 has company-specific issues impacting its capital structure decisions. You should continue to research Nan Nan Resources Enterprise to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 1229’s future growth? Take a look at our free research report of analyst consensus for 1229’s outlook.
- Valuation: What is 1229 worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether 1229 is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.